Paul Krugman vs. Niall Ferguson: You Decide

Here is a great debate that was on CNN that featured Princeton's Paul "Keynesian" Krugman versus Harvard's Niall Ferguson.

There are basically two options that Congress has when it comes to fighting our own version of The Great Depression.

The first one is the "Keynesian" approach where we continue to throw money out of helicopters hoping that it will somehow stimulate the economy.

The second option is the "austerity" approach that Niall Ferguson so brilliantly explains below. This option includes massive spending cuts combined with tax reform that will help stimulate businesses to start hiring again.

We have seen 3 years of the Keynesian approach and it's become clearly evident that the stimulus approach has been a catastrophic failure. As Ferguson explains: We tried this Keynesian approach in the 1970's and we ended up with a lost decade.

Niall also worries that continued "Keynesian" spending will force the world to demand higher interest rates on their treasury holdings.

When risk rises (in treasuries the risk would be a US default) you are forced to pay buyers a premium for taking the risk. This is how markets work. This is why many risky corporate bonds pay 8% interest rates.

Ferguson had an excellent analogy on the "safe haven" status of US Treasuries. He explains that treasuries are a safe haven just like Pearl Harbor was in WWII, meaning things are safe until something changes.

Greece and Spain were safe until one day the bond market decided that their soaring deficits made them unsafe. This change in perception happened practically overnight. Pearl Harbor's "safe haven" status was destroyed in a matter of hours.

There is no reason to think "it's different here". Realtors told us the same thing about real estate and we all know how that worked out.

If we continue to increase our deficits, buyers of our treasuries will demand higher rates to hold them. This is a fact if we continue down our bailout path.

Paul argues that the $800 billion bailout was too small and calls for another one before we give up on the Keynesian approach.

Hey Paul you know what? I am tired of bailouts and cheap money:

I am tired of making 0% on CD's.

I am tired of watching my tax dollars get used to bailout billionaire bankers.

I am tired of worrying that the banking system is going to fail because we are spending too much.

I am tired of worrying about how much my taxes will rise next year in order to pay for this Keynesian mess.

In fact, I am just plain tired of all of it!

Remember Albert Einstein's famous quote: "Doing the same thing over and over again and expecting different results is the definition of insanity."